When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within SuRaLa NetLtd (TSE:3998), we weren't too hopeful.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for SuRaLa NetLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = JP¥323m ÷ (JP¥2.7b - JP¥346m) (Based on the trailing twelve months to March 2024).
So, SuRaLa NetLtd has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Consumer Services industry.
Check out our latest analysis for SuRaLa NetLtd
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of SuRaLa NetLtd.
What Can We Tell From SuRaLa NetLtd's ROCE Trend?
There is reason to be cautious about SuRaLa NetLtd, given the returns are trending downwards. About one year ago, returns on capital were 19%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last one year. If these trends continue, we wouldn't expect SuRaLa NetLtd to turn into a multi-bagger.
In Conclusion...
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 35% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
If you'd like to know more about SuRaLa NetLtd, we've spotted 4 warning signs, and 1 of them is significant.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
About TSE:3998
SuRaLa NetLtd
Provides educational services through e-learning in Japan and internationally.
Flawless balance sheet moderate.
